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What is Unsecured Debt?

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  • Written By: Garry Crystal
  • Edited By: Bronwyn Harris
  • Last Modified Date: 19 September 2016
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Unsecured debt is money that is borrowed but is not secured against any property. A person can borrow loans or take out credit using the unsecured debt method. Some banks and lenders ask the borrower to secure the loan amount against his or her house as collateral. This means that if you default on the loan payments, then ultimately the lender can sell your property in order to pay back the loan.

Banks and lenders will give unsecured debt in most cases depending on how much money the borrower earns. However, with unsecured debt, the amount of interest placed on the money that is paid back can vary. If you have a bad credit rating, the lender can demand a much higher rate of interest on the loan. These high interest rates have been thought to attract people with bad credit ratings who may get stuck in a never-ending debt cycle. Many people will spend years paying back the high interest unsecured debt loans. The final repayment totals can add up to more than double or three times the amount of the original loan taken.

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Many governments are now becoming concerned regarding the amount of debt the average family has. Debt consolidation and debt management companies are busy trying to help people find a way to manage their debt. Easy finance options are being snapped up by people as a way to pay of their current loans and credit cards. The problem of binge debt has become a serious one as people have spending sprees and use one credit card to pay another one, among other reasons.

If handled correctly, unsecured debt can be a good option for many borrowers. A borrower with an unblemished credit rating should have no problem finding low interest rates on unsecured debt. Banks and lenders are all competing for the borrower's business, so shopping around is always advisable. It is generally only when the borrower has a bad credit rating that the problems of high interest rates will occur. Banks and lenders use credit checks as a way of assessing the interest rate to set on an unsecured loan. It is in the borrower's best interest to shop around and take financial advise if considering taking on unsecured debt.

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mutsy
Post 3

Suntan12 - You know this why a lot of banks want you to take out a debt consolidation loan or a home equity loan for debt consolidation purposes.

This is never a good idea because you are turning unsecured debt into secured debt. With unsecured debt you can be sued and forced into bankruptcy but many states still allow you to keep your home and retirement accounts.

However, with a secured debt you can lose your home because the bank can legally force you to sell it in order to pay them and if the home does not cover the debt they can still sue you for the rest.

These types of loans are less risky for banks

which is why they encourage them. The other problem with this scenario is if you take out an equity line on your home to pay off credit cards and then charge up your credit cards again now you will have two problems on your hands instead of one.
suntan12
Post 2

BillBert - I wanted to say that if you had a line of credit in order to finance the business then you are talking about secured debt against a property like a home.

For example, in that scenario the bank can force the sale of your home if you default on the loan and after your property is sold they can sue you for the difference.

These types of loans are recourse loans which mean that the bank can go after you for the loan amount. Now with unsecured debt the creditor can sue you if you don’t pay your obligation and possibly force you into an unsecured debt bankruptcy.

However in this scenario you will usually get to keep your home. You might want to see a lawyer just to make sure but that is my understanding of what happens in both scenarios. I hope that helps.

billbert
Post 1

Regarding Unsecured Debt. Our small company is considering an unsecured line of credit for a business development venture in a latin american country. If for some reason, we got to the point where we had used the line of credit but found we could no longer make payments on this account and in fact couldn't make payments at all. Example: we have $1 mill available. We use $600K but now find we can't get the income stream we were counting on from the development and we can no longer make payments on the UNLOC. What happens?

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